Analysis: Honeymoon wears off for Mexico president's reform push

15 Feb 2013

12h50

updated at 13h36

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A political pact forged with rivals and a couple of key laws already under his belt, Mexico's new President Enrique Pena Nieto got off to a strong start, but he faces hurdles to push through deep economic reforms.

Mexico's President-elect Enrique Pena Nieto attends a media conference after a business meeting at the FIESP (Sao Paulo Industry Federation) in Sao Paulo September 19, 2012.

Photo: Paulo Whitaker / Reuters

Armed with a wide-reaching agenda, the 46-year-old former state governor wants to overhaul Mexico's tax system, state oil monopoly Pemex, a telecoms sector dominated by the world's richest man, Carlos Slim, and competition regulations in a bid to modernize the economy and boost growth to 6 percent a year.

Despite lacking an outright majority in Congress, Pena Nieto managed to push the 2013 budget barely a week after taking office on December 1 and passed a landmark education bill after sealing a broad accord dubbed the "Pact for Mexico" with leftist and conservative opponents.

But his plans may be starting to slip.

"Some were far too quick to voice optimism during the typical honeymoon of a new government," said Gabriela Cuevas, a senator for the opposition conservative National Action Party (PAN). "It's not that simple."

"The Pact for Mexico is no more than a set of issues parties care about ... The devil is in the details."

The government must still pass a separate law to implement its education reform. And while Pena Nieto has vowed to shake up near monopolies in telecoms and television, a bill that was expected in Congress earlier this month has yet to materialize, leaving a cloud of uncertainty over whether he will deliver.

Failure to take on Slim's flagship telecoms giant America Movil as well as the main TV broadcaster Televisa could undermine efforts to forge consensus for key fiscal and energy reforms.

Though Pena Nieto surprised many critics by brokering the broad outlines for reforms with his political opponents, he could face resistance from inside his own centrist Institutional Revolutionary Party (PRI), which ruled for much of last century.

Mexico's economy is expected to grow by around 3.5 percent in 2013, slowing from around 4 percent last year. Economists say deep reforms are vital to spur stronger growth.

"Other countries have done it, why not Mexico?" Pena Nieto told PRI congressmen late last month. "Why remain anchored to dogma, to anachronistic, obsolete debate when other countries like Brazil, Colombia and Cuba have passed reforms to become more productive?"

The government is playing its cards very close to its chest, and has given away few details on how the reforms should look. A PRI party congress due to be held in early March is likely to shed more light on how ambitious the plans will be.

There is the sensitive issue of whether to apply value added tax (VAT) to food and medicine in a country where about half of the 115 million population lives in poverty - and whether to change the constitution to boost private investment in Pemex.

And in July there is an important gubernatorial election in Baja California state, a PAN bastion the PRI could win.

The PAN was routed at last year's presidential election as voters punished it for President Felipe Calderon's messy attempt to crack down on drug cartels, which led to violence that killed about 70,000 people in six years. It may be less willing to cooperate if it loses Baja California and is already warning of foul-play.

"If we see that the Mexican state, or the PRI in power, intervenes in the elections, it puts the whole pact at risk," said Francisco Dominguez, a PAN senator on senate commissions debating the shape of the energy and fiscal reforms.

"If there is a line in the sand, that is it."

Though the leadership of both the PAN and the left-wing Party of the Democratic Revolution (PRD) have moved towards the PRI since the election, the parties are grappling with deep internal divisions, which adds another risk to the mix.

SPECTER OF GRIDLOCK

If political good will evaporates, legislating would likely become an uphill battle that could leave Pena Nieto's reform plans mired in the deadlock that afflicted his predecessor.

Underlying everything, there is a congressional timetable which means Pena Nieto has narrow windows of opportunity in which to try to push reforms through.

"I think we're going to get reforms which when we look back on them, we will be able to say that there was an important change made," said Rafael de la Fuente, an economist at UBS.

"I don't think we're going to get insignificant reforms. But I think the jury's still out as to how we go about this and about their timing," he added.

Pena Nieto wants to open Pemex to more private investment and has floated the idea of selling a minority stake in Pemex, but a partial privatization along the lines of Brazil's Petrobras is seen as very unlikely for now.

The government has made clear that Mexico's oil resources will remain in state hands, and it has not yet revealed the main planks of its pending energy reform.

Mexico is the world's No.7 oil producer and a top exporter to the United States, but output has slumped in recent years and it risks becoming a net importer within a decade.

Opposition senators on a cross-party commission debating its composition say the reform could offer the private sector concessions or joint exploration opportunities, or simply higher fees indexed to output or the size of discoveries.

Pemex was rocked by a basement gas explosion at its Mexico City headquarters late last month that killed 37 people, which cast a spotlight on the company's poor safety record. However, industry experts say it won't deter the private sector.

Alberto de la Fuente, president of Shell Mexico, the local arm of oil major Royal Dutch Shell, says deep changes at Pemex through constitutional change would lure more private sector investment.

"If you don't reform the constitution but you have a structure of secondary laws that are well constructed and that bring clarity to the regime and make it competitive, that could also work," he said.

The political pact says the energy bill will be presented in the first half of the year but lawmakers expect that to be pushed back. Some suspect Congress could have to be called back from upcoming holidays for a special session to debate it.

The government has penciled in a major fiscal reform for the second half of the year, and Pena Nieto hopes it will be passed by Congress, along with the energy reform, by the end of 2013.

But the fiscal overhaul, aimed at boosting one of Latin America's lowest tax takes, has its own sticking point.

Among the options being mulled by the PRI is imposing a reduced rate of VAT on foodstuffs and medicine, in part to help plug a gap that would be created by cutting the tax burden on Pemex, most of whose revenues currently pass to the state.

The PRD is heavily opposed to this idea, and Pena Nieto will also have to woo some sectors of the PRI who are staunchly against raising taxes that will hit the poor hardest.

"We are convinced there are other things we need to tackle first rather than trying to impose VAT on food and medicine," PRD President Jesus Zambrano told Reuters. "Like closing tax loopholes and stopping evasion."

Ordinary Mexicans agree.

"They shouldn't raise sales tax on food. They should help those of us who have less," said 19-year-old Francisco Garcia as he sold snacks next to a busy highway dissecting the capital.